Democratic Dissent May Take Sting Out of Estate Tax Changes

Defections in Democratic ranks may blunt big changes in estate taxes for next year

If Congress fails to act soon, estate law taxes will rise from this year's level of 35% to a whopping 55% next year. Moreover, the threshold of $5.12 million in estate assets that are excluded would fall to only $1 million.

Roughly three dozen agricultural groups have written their legislators asking Congress to keep estate taxes and exclusions at current levels until they can eliminate estate taxes altogether. Uncertainty over future estate taxes, the groups said, makes it difficult for farmers and ranchers in a "land-based" business to make sound business decisions.

President Barack Obama, whose re-election platform included a pledge to raise taxes on the wealthy, proposed raising estate taxes to only 45% next year and excluding the first $3.5 million in estate assets. But a group of influential Democrats, including Sen. Max Baucus (D-Mont.), the powerful chairman of the Senate Finance Committee, aren't willing to go along.

Baucus has been joined in dissent by Democrats Mark Pryor (Ark.) and Mary Landrieu (La.) All three are up for re-election in 2014.

Senate Ag Committee chair Debbie Stabenow (D-Mich.), speaking at Farm Journal Forum 2012, noted that Congress needs to act on estate taxes before the end of the year. While the estate tax rate remains subject to debate, she said, there's "overwhelming agreement" among legislators not to revert to a $1 million exclusion, which will happen if Congress doesn't act this year.

Stabenow, who is also on the Senate Finance Committee, expects that Congress will take a two-step approach to tax changes, first implementing changes to avert the fiscal cliff, then crafting a tax-code overhaul.

A lot of money is at stake. Obama's proposal is part of his deficit-reduction plan announced last week to avert the fiscal cliff. An analysis by the Tax Policy Center estimates that the proposal would raise $276 billion over 10 years. The Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute, says that 7,500 estates would owe taxes next year under Obama's proposal. That compares to 4,000 if current policies are continued.

Though estate taxes don't ensnare that many taxpayers, they are an emotional issue. Many lawmakers from both sides of the aisle buy the argument that families that have held land for generations shouldn't be penalized when they have to sell it because of a death in the family.

But studies have consistently shown that few farms are actually subject to estate taxes. A landmark study by the Congressional Budget Office in 2005 found that under certain conditions, only 300 farms would be subject to estate taxes.

Estate taxes stood as high as 70% in 1977. They were steadily decreased during the George W. Bush administration, falling to 0% in 2010. The Obama proposal would return estate taxes to 2009 levels.

"This will strike a blow to farm and ranch operations trying to transition from one generation to the next," AFBF President Bob Stallman said earlier this year. "A $1 million exemption is not high enough to protect a typical farm or ranch able to support a family and, when coupled with a top rate of 55%, can be especially difficult for farm and ranch businesses."

Current estate tax policy was set by the Unemployment Insurance Reauthorization and Job Creation Act of 2010. The bill put in place new provisions for 2011 and 2012 that allowed the unused portion of a spouse's exemption to be used by a surviving spouse.

Several provisions enacted through the years reduce the burden of estate taxes on farms and small-business owners. A special provision allows farm real estate to be valued at farm-use value rather than at its fair-market value. Also, taxes can be paid on an installment basis. There's a special deduction for family-owned business interests. Another provision encourages farmers and other landowners to donate an easement or other restriction on development in return for tax savings.

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Anonymous12/6/2012 12:29 PM

Why is there an estate tax anyway? Think about it....gets you coming and going.

Anonymous12/6/2012 06:24 PM

Just because only 300 farms would have been affected back in 2oo5, that doesn't mean there isn't a problem today. A one million dollar exemption level is peanuts at current land prices! Even an exemption at $5 million is borderline --- we probably need an increase in the special use valuation limit, as well.
Despite this, I do firmly believe in the principal of an estate tax. Saying the money has already been taxed is misleading, as unrealized capital gains would not have been. Also, it's a way to get some tax dollars from those who built their estates by less than reputable methods. Most importantly of all, in my opinion, is that it is a backstop to prevent a situation similar to old Europe, where almost all the land and wealth became concentrated among a few families. It helps guarantee that the "American dream" will remain possible for those not born into the "right" family.

Anonymous12/7/2012 04:49 AM

Worst case scenario. If it goes back to 1 million and the rate goes to 55%, as farmers pass on their family will have to deal with estate taxes. With land going for $8000 and above, some friends had heard $10,000, that gets it down to 100 acres tax free. With no reserve, they would have to sell 55% of the remaining just to pay the estate taxes. The good news is that the price of land will start dropping but the bad news is that the assessed valuation will not drop as quickly. Forcing future heirs to sell even more land to pay the tax.
Our Congress and President have had over 3 years to cure the problem, but none deemed it worthy enough to actually address it. Blame both Republicans and Democrats, they are all to blame. The only answer is a new third party that will actually take care of business. Any politician that blames it on the opposite party should be thrown out of office.
If they want to cut Social Security, that's fine as long as all people go on that and lose all their sweetheart retirement deals. All state, county and federal workers go on Social Security along with the President. No special favors for any of them. No guards, no cars and no housing or medical benefits. Just Social Security like the rest of us. And if ObamaCare holds, they get that as well.
If the Presidents do a good job, they don't need security. they will be so beloved that nobody would hurt them. If not, let them hire their own.
Cut the pork and foreign aid first, or maybe right after the benefits for federal workers, and then start making the cuts. Right now, the farm program payments don't seem to be needed, just cut them out for now. In fact, just shut down the complete farm program. Food stamps and all. LOL, that ain't happening is it.
Cut the military budget, a billion dollars for a plane? Hundreds of dollars for a hammer? Toilet seats? Somehow that seems to be a fitting expenditure for them to flush our money into the pockets of the military contractors. NASA? What advance have we seen for the billions spent there. Shut it down. Moon walk? Really? What did that accomplish if it really happened?
A new Party that really Gives A shit, call it the GAS party. If for no other reason than present politicians give me loads of it. President WhyMe of the GAS party. Kind of has a ring to it, don't it. When we get our taxes figured out, how many say "Oh crap, Why Me?" Let it be a reminder, and If I'm elected President...